The problem is not just how fierce the foreign bank’s China layout is, but also how fast the international layout of Chinese brokers is.

文 | Liu Jing

Edit | Hong Ye

More than 20 years ago, when Jack Wadsworth, then the head of Morgan Stanley ’s Asian operations, called China the “next big thing,” he might not have expected that in their subsequent marriage with CICC in the century, The old Wall Street investment bank where he works will gradually become a pure financial investor from a strategic partner until it finally withdraws completely.

Like some kind of metaphor, Morgan Stanley, who was the first to die, also mirrors the common destiny of foreign investment banks that have entered the Chinese market for many years: “Wolf” is here, but it shows more goodness than fierceness.

The root cause comes from many sources. There are both domestic and foreign dissatisfaction with foreign banks, and many constraints on China’s regulatory policies. But now, a key variable is about to emerge.

According to the timetable given by the China Securities Regulatory Commission, on December 1, this year, foreign securities companies ’shareholding in joint ventures will be further increased from 51% to 100%, which is equivalent to removing the restrictions on foreign shareholding of securities companies. . By that time, not only can foreign investment banks realize controlling shares, it is even possible to set up wholly-owned subsidiaries in China.

Foreign investment banks have heard the news.

Goldman Sachs, UBS, JP Morgan Chase, Nomura Securities, etc. have all clearly released information on office expansion, staff expansion, and new business. JPMorgan Chase CEO Jamie Dimon even stated that the company is committed to bringing “full power” into China. Goldman Sachs plans to double the number of Chinese employees to 600 within five years. It also applied to the Securities and Futures Commission to increase the share ratio of Goldman Sachs (JV) from 33% to 51%. Achieve full control.

In the history of China’s capital market, there have been two waves of foreign investment banks entering China. The first was marked in 1995 by Morgan Stanley’s participation in CICC, and the second appeared in 2001 when China joined the WTO. After these two battles, most of the world’s best-known investment banks have set up offices in China or have clear business development. In the context of the opening of the financial industry to the outside world, the policy on foreign investment in the securities industry has also been promoted step by step.

If this is taken into account, it should be regarded as the third wave of Chinalization of foreign investment banks at this moment. Due to the full liberalization of this key issue and more supporting policies are showing greater tolerance, foreign investment banks have almost gained the same status as domestic capital. Compared to the previous two waves, this year is undoubtedly a more proactive opportunity for foreign investment banks.

For their competitors, domestic investment banks and the entire Chinese market, is this time the shark really come? The third wave of Goldman Sachs will have an impact on domestic institutionsShock?

25 years of pathfinding in China

The story of China for foreign investment banks begins with CICC.

On June 25, 1995, China’s first joint venture investment bank, the full name of China Investment Bank, was established. The foreign representatives and the most important participants are China Construction Bank Investment and Morgan Stanley. Since then, CICC has been in an important position in the Chinese capital market for a long time, especially in China’s large-scale overseas IPOs (China Telecom, PetroChina, Sinopec, etc.).

Even today, the domestic investment industry has formed a so-called “three Chinas and one China” (CITIC Securities, CICC, CITIC Construction Investment Securities, and Huatai United Securities) pattern. A family of “investment bank” semantics in western capital markets.

Looking back, although there is a certain “speciality” of CICC due to historical reasons (such as its total foreign capital accounted for more than 50% at that time), but It has established a popular path for foreign investment banks to enter China: joint ventures.

In 2001, China joined the WTO, and the concept of “joint venture” was clearly defined as: foreign investment can hold 33% of shares in securities companies (up to 49% in 2012), and the controlling right must be controlled by the Chinese side. Since then, such as China Europe International Securities (later equity change, renamed Wealth Lyon), a joint venture set up by Xiangcai Securities and Lyon Securities, Changjiang Securities and Paris Peregrine established by Paris France A product of the times.

Goldman was once an exception. In the Goldman Sachs Goldman Sachs joint venture with Goldman Securities, although on the surface Goldman Sachs holds 33% of the shares, the latter owns the remaining 67%, in fact, the 6 natural person shares of Goldman Sachs Securities are derived from Goldman Sachs’ business loan. Through such a clever financial arrangement, Goldman Sachs actually holds a complete dominant position among joint venture brokers.

The reason why the issue of stock ratio is so important is not difficult to imagine-it means who has a greater say.

Take CICC as an example. Since its inception, the Chinese side and Morgan Stanley have been arguing over issues such as company positioning and dominance. Later, Morgan Stanley gradually became a pure financial investor from a co-manager. Until 2010, Morgan Stanley finally ended its 15-year partnership with CICC and invested in the arms of Huaxin Securities.

Another detail that has been repeatedly mentioned is that in the listing of China Telecom on the New York Stock Exchange and the Hong Kong Stock Exchange in 1997, Morgan Stanley, then the second largest shareholder of CICC, theoretically “close to the water platform” “Get the month first”, but the result is that it not only missed this huge transaction with a financing amount of up to 4 billion US dollars, but also lost to itRivals: Goldman Sachs.

“Control is a fundamental issue.” Many people working for foreign and domestic investment banks pointed out that the imbalance in equity structure and management power is a common problem among many joint venture investment bank brokers. Once foreign shareholders think that their right to speak has not been fully exerted, their enthusiasm for investment in human and material resources will be greatly reduced.

Share ratio also implies a more direct issue: the level of potential returns. This is self-explanatory. It is like saying that, compared with a task whose reward will be completely yours, it seems unavoidable to carelessly when you face a task where only one third of the reward belongs to you.

In addition to the key issue of stock ratio, joint venture investment banks also have a lot of constraints at the business level. Except for some lucky ones, most of the joint venture banks are allowed to focus on investment banking business such as securities underwriting, financial advisory, etc., unable to get involved in the fields of brokerage, asset management, derivatives, and many of them are foreign institutions More advantageous plates.

The above is the crux of the tepid business of most joint venture investment banks in China. A research report released by Zhiyan Consulting shows that of the 11 joint venture securities brokers, except for CICC, the remaining 10 companies ranked behind 70 in 2017, which is lower than the median of the industry and the overall scale of operations is also relatively small. small. The five companies have negative net profits and are in a loss situation. All indicators are at the end of the industry.

Of course, in the Chinese context that emphasizes financial regulation, all of this has its own rational and inevitable side. But for these foreign investment banks that have great enthusiasm for the Chinese market, the past 25 years have been 25 years when they have been marginally tempted, and they can also be said to be unpaid 25 years.

Will foreign investment banks erode the cake of domestic investment?

This appears to be an inevitable situation when foreign investment banks have made all-round breakthroughs in terms of share ratio and business scope. However, based on the opinions of multiple investment bankers, it is believed that from the perspective of traditional investment banking (IBD: Investment Banking Department, which mainly includes corporate IPOs and mergers and acquisitions), this phenomenon is unlikely to occur in the short term.

From the perspective of policy maturity and project coverage, the key points for the two domestic investment banks to win are that foreign institutions have no obvious competitiveness.

As one of the most important financial intermediaries in the capital market, the core competitiveness of European and American investment banks is reflected in its pricing power, which is to strike a balance between enterprises and investors. In China, due to historical and market conditions, the key skill of the brokerage investment banking department is “passing the meeting.” Although this situation will be reversed as China’s capital market moves towards registration, in the past many years, the channel business has indeed been the main source of income for many domestic securities firms. Moreover, the domestic brokerage industry has been in the Red Sea for many years, and foreign investment banks are not wise enough to compete for such a market that they are not good at and have limited incremental space.

In oneSupplying a homogeneous market is about the ability to take projects. But a long-term embarrassment for foreign investment banks is: “It is difficult to take over large projects, and small projects are unwilling to take over.” Due to its limited number of people, the information capture capability cannot be compared with domestic-funded institutions, and at the same time, because foreign bank personnel generally have higher salaries, they naturally cannot implement the “people-sea tactics and win by quantity” like some domestic-funded institutions.

And this situation will not change fundamentally because of the policy liberalization of the brokerage industry.

IBD is obviously not the only cake on the table. In addition to the traditional investment banking sector, large investment banks usually also include assets management, wealth management and other businesses. For example, after Morgan Stanley experienced the financial crisis in 2008, it gradually transitioned to wealth management. It accounted for 42% of wealth management income in 2018.

According to the information we have learned, foreign banks that are expanding their presence in China are obviously more interested in this business.

Todd Leland, co-president of Goldman Sachs’ Asia-Pacific business (except Japan), previously said in an interview with the media that Goldman’s expansion in China will be partly driven by “explosive” growth in asset management. It targets the huge amount of investable assets of Chinese residents. “As the dominant guaranteed wealth management is gradually eliminated, customers will look for assets other than cash and real estate to diversify their investments.”

The joint venture securities company approved by Nomura Securities will initially focus on wealth management, and will use the consulting advantages of Nomura to conduct wealth planning through interviews to serve Chinese high net worth individuals.

From the industry ceiling, wealth management is indeed a more anticipated sector in China’s investment banking chain. According to the “2019 China Private Wealth Report” issued by China Merchants Bank in collaboration with other institutions, as of 2018, the size of China’s individual high net worth individuals reached 1.97 million, and the total size of investable assets held by individuals across the country reached 190 trillion yuan.

Now, when the traditional sections of the brokerage investment bank, such as the brokerage business, are near the ceiling, a large number of domestic-funded institutions also claim to accelerate the transformation to wealth management. However, in the past many years, the leading group of domestic wealth management business must be in the hands of large banks, and the investment bank of securities firms is in a relatively backward position.

Of course, the lack of history also means that the potential opportunities are greater. From the perspective of some investment bankers, The entry of foreign banks from wealth management is based on “growth” choices, but at the same time it will squeeze domestic securities firms in this market.

Please come in and go out

For the industry itself, the entry of foreign banks into China will inevitably bring about talent flow. Foreign banks are more attractive in terms of salary and brand. The impact of large-scale talent digging on domestic capital may be much greater than the impact on the business itself in the short term.

But this process is not necessarily radical. Due to office hardware, complianceWith high system requirements, investment banks often take longer to open an emerging market than ordinary commercial companies.

An example might confirm this. According to legend, around 2006, Goldman Sachs proposed to install a fresh air system before moving into Beijing Yinglan International Financial Center. Therefore, in the era when most people had no concept of PM2.5, Yinglan became the earliest in China to have fresh air. One of the office buildings. Goldman Sachs also proposed that there should be no power outages for 24 hours, and Yinglan was equipped with at least two backup power generation systems for this purpose.

In the interview, “cross-border transactions” is another important variable that many people mentioned after foreign investment in China.

Cross-border is of course the advantage of foreign banks: Over the past two decades, Chinese companies’ overseas listings have almost always been equipped with at least one foreign investment bank. In addition to the policy reasons for the listing destination, It lies in the absolute advantages of foreign banks in understanding the local capital market and reaching institutional investors.

Although there is no large-scale overseas listing of Chinese companies, a large number of Chinese companies are seeking overseas expansion. In theory, the cross-border ability of foreign investment banks will be even more needed.

In fact, this is exactly the new area that Chinese-funded institutions are betting on. At present, at least 7 domestic securities brokers have been approved to conduct cross-border business. For example, Huatai Securities acquired its entire stake in AssetMark Financial Holdings, Inc. through its wholly-owned subsidiary, Thai Financial Holdings (Hong Kong) Co., Ltd., which is the leading turnkey asset management platform in the US market. After the acquisition was completed, AssetMark was listed on the NYSE in July 2019.

So, For the current Chinese brokerage investment industry, the problem is not just how fierce the foreign bank’s China presence is, but also how fast the Chinese brokerage’s international presence is.

Many Chinese-funded institutions also target Goldman Sachs, which covers the global market. But for now, it seems that Chinese brokers still have a long way to go. Even as China CITIC Securities, China’s largest securities company, its total assets in 2017 were only equivalent to 10.44% of Goldman Sachs.

But there is no doubt that the “going out” of investment banks of Chinese securities firms will be one step closer to their goals at Goldman Sachs.